2014 (6) TMI 287 - AT - Income Tax

Deletion of unexplained expenses u/s 69C of the Act Held that - CIT(A) was rightly of the view that the assessee has been able to show on the basis of evidence that there was longevity yield on processing of Nylon cloth and that the analysis made by the AO on information obtained from M/s. Pioneer Syntex Private Limited was not correct as it did not consider opening and closing stock with the said concern - even otherwise the addition made by the AO on account of unaccounted purchases was not correct assessee on its own has offered the full value of sales as income and not claimed purchases against them in the books - assessee is engaged in manufacturing and trading of synthetic cloth - no material could be brought on record by the Revenue to show that the assessee had actually made any investment in purchases which was not recorded in its books of account - In absence of any material, there was no reason to interfere with the order of the CIT(A) Decided against Revenue. Deletion of unaccounted stock found in survey Held that - There was excess stock of Rs 2,02,129/- which was explained by the son of the assessee as return of goods at the time of the survey - The assessee was not in the station at the time of the survey - the statement of the assessee which was recorded u/s. 131 of the Act was rejected by the AO without making any attempt to verify the genuineness of the same - No material was brought on record by the AO to show that there was any error in the statement of the assessee recorded u/s 131 by making due inquiry - the AO was not justified in rejecting a plausible explanation without making necessary inquiry Revenue could not point out any error in the finding of the CIT(A) which was to the effect that the trial balance prepared at the time of the survey itself shows that some job work charges which were also actually paid by the assessee before survey were not properly recorded in the books of account thus, there was no reason to interfere with the order of the CIT(A) Decided against Revenue. Deletion of interest expenses u/s 40A(2)(b) of the Act Held that - The assessee claimed deduction for interest payment to five parties on loans taken from them at the rate of 12% - the interest paid by the assessee at the rate of 12% was quite reasonable as the Income Tax Department itself pays interest at the rate of 15% per annum on the refund granted to the assessee after the completion of the assessment u/s 244 of the Act thus, there was no infirmity in the order of the CIT(A) Decided against Revenue. Restriction of disallowance of various expenses Held that - The AO made an estimated disallowance of 20% out of the various expenses claimed by the assessee which was restricted to 10% by the CIT(A) - No material was brought on record by the revenue to show that the estimation made by the CIT(A) for disallowance of expenditure at 10% was unreasonable and that actually an amount more than 10% of the expenditure disallowed by the CIT(A) was required to be disallowed there was no reason to interfere with the order of the CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Deletion of addition on account of unexplained expenditure under Section 69C of the Income Tax Act.
2. Deletion of addition on account of unaccounted stock found during the survey.
3. Deletion of addition on account of interest expenses under Section 40A(2)(b) of the Income Tax Act.
4. Restriction of addition on account of disallowance of various expenses.

Detailed Analysis:

1. Deletion of Addition on Account of Unexplained Expenditure under Section 69C:

The Assessing Officer (AO) observed that the assessee had shown an excess yield of 28,045.25 metres in the quantitative details, attributing it to the elongation tendency of Nylon fabrics. The AO disbelieved the explanation, suggesting that the excess yield was due to unaccounted purchases, resulting in an addition of Rs 10,81,573/- as unexplained expenditure under Section 69C.

On appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) found that the assessee had provided sufficient evidence of longevity yield in Nylon cloth processing and that the AO's analysis was flawed as it did not consider the opening and closing stock. The CIT(A) concluded that the addition was unwarranted since the sales were fully recorded, and the assessee had shown excess profit corresponding to the unrecorded purchases.

The Tribunal upheld the CIT(A)'s decision, noting that the Revenue could not provide any material evidence of unrecorded purchases. The ground of appeal by the Revenue was dismissed.

2. Deletion of Addition on Account of Unaccounted Stock Found During the Survey:

During a survey, the AO found a physical stock of Rs 7,30,782/- against a book stock of Rs 5,28,652/-, leading to a difference of Rs 2,02,129/-. The AO added this difference as unaccounted stock investment.

The CIT(A) observed that the assessee was not present during the survey and provided a reconciliation in his statement under Section 131, explaining that job charges not fully debited in the trading account accounted for the difference. The CIT(A) found this explanation plausible and supported by evidence, thus deleting the addition.

The Tribunal agreed with the CIT(A), stating that the AO had not verified the genuineness of the explanation and had no material to disprove the assessee's statement. The ground of appeal by the Revenue was dismissed.

3. Deletion of Addition on Account of Interest Expenses under Section 40A(2)(b):

The AO disallowed Rs 1,03,836/- out of interest expenses, considering the 12% interest rate paid to related parties unreasonable compared to the 9% rate available from banks.

The CIT(A) held that unsecured loans are not comparable to bank loans due to additional expenses and security requirements. He found the 12% interest rate reasonable and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, noting that the interest rate was reasonable as even the Income Tax Department pays 15% interest on refunds. The ground of appeal by the Revenue was dismissed.

4. Restriction of Addition on Account of Disallowance of Various Expenses:

The AO disallowed 20% of various expenses, totaling Rs 93,340/-, due to lack of proper documentation and the possibility of non-business usage.

The CIT(A) reduced the disallowance to 10%, acknowledging that while not all expenses were for business purposes, some were necessary.

The Tribunal found no reason to interfere with the CIT(A)'s estimation, as the Revenue did not provide evidence that a higher disallowance was warranted. The ground of appeal by the Revenue was dismissed.

Conclusion:

The appeal by the Revenue was dismissed in its entirety. The Tribunal confirmed the CIT(A)'s decisions on all grounds, finding no substantial errors or reasons to overturn the deletions and restrictions made by the CIT(A).